Dangerous days for bears
Late last week “a massive, nearly 400-pound black bear wandered into a residential area in Alligator Point, Florida. Wildlife officers decided to remove the bear from the neighborhood using a tranquilizer, and safely return him to his habitat.”
Unfortunately, these days are especially dangerous for bears. After being shot with a tranquilizer dart, the bear panicked and ran towards the ocean. But as the tranquilizer started to kick in, the bear became drowsy and began to drown.
Luckily for the bear, Wildlife Commission biologist Adam Warwick swam into the ocean and blocked him from advancing further. Adam then grabbed the bear by the scruff of his neck and dragged him to shore.
This story prompted a great tweet from one of the funnier market guys on the internet:
Last week the real life stock market bears did not fare that well as there was no Adam Warwick to save us from the excess liquidity.
S&P 500 trading</a> </div>
The buying panic accelerated throughout the week. We are now almost 90 handles up off the Tepper “it’s nervous time” lows.
S&P 500 trading over the last month</a> </div>
I am obviously early (and wrong) on my short S&P 500 through long puts position. But given the cheapness of the puts, and the violence of this one way rally, I am going to hang tough.
We are extremely overbought and consensus is quickly getting all bulled up. I know that you will read all sorts of wise sounding advice about how no one can time a top. These same pundits will use this as an excuse for being fully invested – after all, the market is heading straight up.
I can tell you with certainty that although no one can time a top, chasing markets that are up 5% in a straight line is a recipe for disaster. Remember the whole concept of buying assets as they move lower and selling when they head higher? Executing on this foreign concept is difficult. There is no doubt that it is easier to be part of the herd that chases it both up and down.
But remember how “bad” the market looked at 1860 when Tepper was shitting all over it? Now that it has rallied 90 handles you want to buy it?
No thanks. I don’t know what is going to cause the pull back. I am not sure if it is coming from the 1950 level on the S&P 500, or 1975 or 2000. But I do know that as it goes higher, stocks are a better sell, not the other way round.
Mexico surprises with a cut
One of the reasons for Friday’s upside food fight in risk assets was the surprise cut in Mexico. In a move that none of the economists that Bloomberg surveyed had predicted, the Mexican Central Bank cut their bench mark rate by 50 basis points to 3%.
I had been long Mexican Peso, and once I saw the headline I immediately covered the position. I am not necessarily bearish, but over the past month the Peso had moved my way and whenever something surprises out of the blue, I have found the sidelines is the best place to analyze it.
Mexican Peso rate (lower rate means stronger Peso)</a> </div>
My two cents about Mexico is that the ECB’s move to negative rates has given the other Central Banks some leeway with experimenting with easier policies. When one of the world’s major Central Banks pushes their interest rates to below zero it takes a lot of pressure off maintaining a relatively tight monetary policy.
I expect more smaller Central Banks to follow Mexico’s lead and also ease monetary conditions in the months to come.
My guess is that risk assets understood this new development. This was part of the reason for Friday’s continuation in the already extended rally.
The financial vs real economy
Although it might seem like it is a contradiction for me to be bearish on stocks while I am arguing that the worlds’ Central Banks are going to err on easing over the coming months, I feel that too often market pundits assume that stock prices will move with the economy.
My belief is that US stocks are fully priced and that good economic news will not necessarily result in higher prices for risk assets.
In fact, I think that short bonds is a much better risk reward trade than long stocks. And although I was waiting for 2.5% before adding to the position, on Friday I decided to add a little bit more to my short position in case I don’t get my opportunity.
US 10 Year Yield</a> </div>
We are currently in a strange environment where investors are reaching for financial assets, while shunning all other exposure. They are assuming that the perfect world of no inflation and accommodative Central Banks will continue forever.
Emerging Markets vs. Copper
This strange dichotomy is evident with break downs in long standing relationships between assets like Emerging Markets and copper. Traditionally these two assets have had a very close correlation.
Copper (yellow line) vs EEM (white line)</a> </div>
You will notice that although these two assets have basically traded on top of each other over the last half dozen years, lately the two have gone in complete opposite directions. Here is the chart over the last year:
On Friday the EEM (Emerging Markets ETF) gapped higher while copper was pushing back down into the recent lows.
I am aware about the concerns about the Chinese stock piling of metals, but these sorts of break downs are occurring in many aspects of the market.
My belief is that we are in the midst of a rush of panic buying into all forms of financial assets. I am going to let them have their financial assets. Chasing high yield debt at new lows in yields, or buying the S&P after a 90 point straight up rally, or buying into tech companies in the private market at record valuations takes a lot more courage than I have.
I for one am not so sure that the economy is quite as weak as the bulls that are relying on an ever present accommodative Federal Reserve believe.
I will take the other side of their “bearish on the economy, bullish on financial assets” trade. I am going to bet that the economy surprises to the upside, and that although it will be good for Main Street, Wall Street might be surprised…
Peeling off some Birchcliff Energy
I have been lucky enough to have bought a little BirchCliff Energy as one of my long natural gas plays. Since buying it, Birchcliff has run like it stole something.
In keeping with the strange discipline of selling stuff as it rises instead of when it declines, I have peeled some off into the latest rally.
Birchcliff Energy</a> </div>